Wealthy taxpayers may want to shift income into 1992

The prospect of higher tax rates for some taxpayers next year has financial advisers putting a reverse spin on advice they normally give this time of year.

Instead of advising high-income clients to take maximum advantage of deductions before the end of the year and defer as much income as possible until next year, most tax experts are urging wealthy taxpayers to accelerate income into 1992 and defer deductions until 1993.


The theory is deductions will become more valuable, and income more costly, for the wealthiest individuals as the top tax rate rises to 36 percent from 31 percent as promised in President-elect Bill Clinton's first year.

But financial planners also warn against reacting too quickly to the expected tax changes because most taxpayers will be left unscathed by the higher rates.


While no definite plan has emerged from Mr. Clinton's economic team on exactly where the higher tax rates will fall, the target will most likely be couples with annual incomes of more than $200,000, though it could fall to incomes as low as $140,000, said Robert S. Greisman, a tax partner at Grant Thornton.

"[Mr. Clinton] is talking about a tax increase, but it isn't going to hit most people," said David Friedlander, tax partner for personal financial planning at KPMG Peat Marwick.

"With all this talk of tax changes, you have to ask yourself, 'Where do I fit in?' " said Steve Weinstein, a partner in personal tax planning at Arthur Andersen & Co.

Uncertainty over next year's tax rates makes evaluations of this year's and next year's income very important.

"There is no way you can do effective planning without taking a snapshot of what this year will be like," said Mr. Greisman. "This year, you should also do that for next year to [try to] determine what tax bracket you'll be in."

Middle-income taxpayers -- whose rates are not expected to be affected by Mr. Clinton's proposals -- may wish to make the usual year-end adjustments by deferring income wherever possible into next year and accelerating deductions into 1992. But those in the highest bracket may wish to reverse the strategy.

Accelerating income into 1992 may be impossible for many salaried employees, but it may be an option for those who receive a year-end bonus usually paid in February or March. Some companies have been paying bonuses early to help their employees' tax planning this year.

Executives who hold stock options that expire next year may wish to exercise them before the end of the year, as the income from the options next year is likely to be taxed at a higher rate.


But if the options expire several years from now, it probably doesn't make sense to exercise them now, Mr. Weinstein added.

Self-employed individuals who fall into the highest bracket may try to speed up their billings and aggressively collect payments before the end of the year to gather as much income into this year as possible, Mr. Greisman said.

On the deduction side, an upper-income taxpayer under contract to buy a house this year may wish to defer the closing until January, so the points on the mortgage will be deductible next year.

Anyone in the middle-income brackets would normally wish to close before the end of the year, to take advantage of deducting the points -- fees charged by the lender -- this year.

Some high-income taxpayers have been deferring charitable contributions until next year, when higher rates will make all deductions more valuable.

"But for a $1,000 gift, you're talking about a deduction of about $50," said Mr. Weinstein, who counsels taxpayers to keep the magnitude of savings from these strategies in mind.


While upper-income taxpayers have received the most attention this year, recent changes in the tax code may cause some middle-income taxpayers to stumble on issues other than the tax rate.

* Withholding: Many workers may be subject to new rules on withholding taxes from their paycheck or on estimated taxes if they're self-employed, Mr. Friedlander said.

If a worker's adjusted gross income is higher than $75,000, and if his 1992 income is at least $40,000 higher than 1991 income, he must make certain his employer is withholding enough for taxes, or that he is paying enough in estimated taxes if self-employed.

TC Failing to do so can bring stiff penalties for under-withholding.

If an employee has made an estimated tax payment in the past three years or has paid an under-withholding penalty in that time, he must make sure 90 percent of his 1992 tax is withheld, or paid in estimated taxes, to avoid penalty.

Previously, employees could simply use the withholding level for the previous year to fix their current withholding, and pay any difference after April 15.


"There are going to be people this will catch by surprise," Mr. Friedlander said.

* Investments: With the seesawing stock market this year, many investors may hold paper losses on some issues and gains on others.

"Investors should look at their portfolio, see what losses they have, what gains, and do some offsetting," said Mr. Greisman.

Investors can avoid paying capital gains on profits from appreciated stocks they've sold by offsetting the gains with similar amounts of losses from other issues they've sold. So if an investor knows he has a capital gain from a transaction earlier in the year, he may look in his portfolio for a loss of similar size and sell those shares, Mr. Greisman said.

But he warns not to sell a losing share that is likely to suddenly turn around next year. "Put the investment decision first, and be mindful of the tax decision," he said.

* Mortgage refinancing: With the wave of mortgage refinancing that occurred with this year's low interest rates, many taxpayers may have questions about what costs they may deduct from 1992 taxes.


For most taxpayers, the answer is: not much. While buyers of a new home generally may deduct all the points paid to a lender in the year they bought their house, the rule of thumb for refinancings is points may be deducted only over the life of a mortgage, Mr. Weinstein said.

But if a homeowner has just undertaken the second refinancing of his home this year, he may deduct this year all the points remaining from the first time he refinanced the mortgage.